Saturday, December 17, 2011

The background research for this CLIF session was put together by Surabhi Rajpal, Teaching Associate for the Corporate Law courses here at NLS.

We started with a timeline of the proposed FDI changes - the discussion on this issue has been going on for well over ten years. The first instance was that of the Task Force set up under MS Ahluwalia in 1999 which focused on enhanced FDI limits in the retail sector as a means of achieving greater economic growth to the Parliamentary Standing Committee Report in 2009 which stated that the social impact of these measures had not been taken into account.

What distinguishes FDI is that it purports to create a "lasting interest" in the productive assets of the economy. It also allows for influence over management in the entity that is being invested in. India has a sector-specific FDI policy, which is governed by inter alia, the Foreign Exchange Management Act and the regulations thereunder. Other legal instruments that may be taken into account are the press notes and circulars by the Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry. These circulars are usually notified by the RBI. Parliamentary approval is not necessary for the proposed changes, but the UPA government's idea was to create more legitimacy for this move.

The following issues were brought up to assess India's "legal" preparedness:

(a) under the constitutional scheme, the implementation of this policy would be the prerogative of the state governments (List II, Entry 27 in the Seventh Schedule) - does this move take the state governments into confidence?

(b) India's labour law situation is miserable - 95% of the labour force is unorganised sector; loss of jobs inevitable. Are our labour laws stringent enough to meet the challenge of violations in short term contracts & employment by MNCs?

(c) the megastores that invariably result from the opening up of these markets require huge tracts of land - under our land laws, acquisition for a "fair price" is allowed. Will acquisition proceed in a just fashion for private entities? How do we address the question of conversion of agricultural to non-agricultural land?

(d) will any of these measures fall foul of our obligations under GATS? Once investment is allowed, it will be difficult to regulate activity e.g. Thailand.

Our discussions on these questions brought up the following issues - (a) will it encourage innovation amongst the smaller vendors and thereby keep them in business? (b) what would be the role of the Competition Commission in this regard? (c) will greater regulation for e.g. limiting the number of players in a given geographical area like they did in China solve the problem? (d) Would minimum pricing as was the case in Germany when Walmart entered the market solve the problem? (e) what explains the attitude of the big domestic retailers?

Although the plans have been shelved for the time being because of political opposition, it was evident that India seemed legally unprepared for a move of this nature.